EU banks head for US to warn of Basel II nightmare

Representatives of some of Europe’s largest banks, including ABN AMRO, Deutsche Bank and the Royal Bank of Scotland, will travel to Washington on Thursday (25 May) to demand a level playing-field between the EU and the US in applying global risk-capital rules.

They are concerned that the rules – named Basel II after the Swiss-based G10 banking committee which drafted them – are being implemented in different ways in the EU and the US. These differences, the banks will warn US regulators, will put a significant financial and administrative burden on banks with operations on both sides of the Atlantic.

Basel II is the updated version of the Basel I rules, which dictate how much risk-capital banks have to hold in order to operate. Basel II was formally endorsed by the G10 countries – including the EU and the US – in June 2004, but it has yet to enter into force in national legislation.

Concerns have already been aired about the US’ decision last September to delay implementation of Basel II, which will apply to its largest banks, until 1 January 2009, whereas it will come into force in Europe in two stages, in 2007 and 2008.

Although the US is so far sticking to the 2009 deadline, there are fears that this could be pushed back even further.

In the meantime, smaller US banks will apply a watered-down version of Basel II (known as Basel IA).

But European banks with subsidiaries in the US are worried that this will see them having to adapt their systems to Basel IA and then to Basel II at huge operational cost.

As well as the timing issue, the rules themselves have not been put into national law in the same way. As a result some fundamental issues, such as the definition of default, vary on either side of the Atlantic, creating potentially huge problems for banks.

“The definition of default is one of the core parameters in the calculation of capital requirements. Divergences in this respect will imply a substantial additional burden on banks when it comes to consolidation at group level,” said Uta Wassmuth from the European Banking Federation.

There are also discrepancies between the rules on ‘intragroup exposure’ – the capital that has to be held for loans between branches or subsidiaries of the same bank. This is an extremely complicated issue, which delayed the EU’s version of Basel II as it was moving through European Parliament, over concerns that it would unfairly hit German savings banks.

One solution, Wassmuth said, might be to agree that both the EU and US regulators accept that the rules are different but that they are equally valid, known in EU jargon as ‘mutual recognition’.

“The potential competitive implications, ie the fact that some banks might have an advantage over others, must be given careful consideration,” said Wassmuth. “We hope that the US regulators will be open to our concerns.”

Although the European banking industry is keen to set the ball rolling as soon as possible, the US authorities may not be able to react immediately, as they are waiting for the official notification of their national law on Basel II. This is expected in June and will be followed by a four-month consult-ation period.

Regulators are also waiting for a study from the US’ Government Accountability Office on the impact of Basel II, which will not be published until March 2007.

A second EU-US dialogue, to which the Basel implementation committee is also invited, is scheduled to take place in Washington on 8 June.